Including exchange-traded funds within discretionary managed portfolios can be a “challenge”, according to James Sullivan of Tyndall Investment Management.
The head of partnerships for the discretionary fund manager told FT Adviser how positive developments in the ETF market have allowed managers to get low-cost exposure to stock markets without being held hostage to market-cap weighted indices.
For example, the rise of equally-weighted ETFs has allowed DFMs and MPS managers to remain invested in the S&P 500, at the lower cost that passive funds offer, without exposing underlying clients to the top seven tech stocks and the resulting concentration risk.
But Sullivan said it has become a “challenge” to do this on platforms, largely because not all platforms “treat ETFs very kindly”.
He explained: “For an MPS provider such as Tyndall, which is managing money across 12 to 15 different platforms, we need consistency.
“So if some of those platforms do not treat listed securities, such as ETFs, equally to index mutual funds, it can be a challenge to include ETFs.”
Many platforms, as FT Adviser has reported previously, have been slow to include ETFs or investment trusts within their fund mix, which reduces choice.
Another barrier to ETFs is platforms not allowing fractional dealing in shares, which can make it harder to deal in the funds.
Even some of the largest platforms in the UK, such as Hargreaves Lansdown and Fidelity do not allow fractional dealing, while AJ Bell does not permit it in its Isa, Sipp and GIA accounts.
In October, Toby Dudley-Smith of DWS told FT Adviser that such traditional retail platforms would find themselves fighting against the ‘neo-brokers’ such as eToro and younger advisers.
At the time, he said: “The retail platforms have moved extremely slowly to make ETFs available to all investors but I suspect that a lot of them are coming under increased pressure from neo-brokers.
Cost considerations
It comes down largely down to transaction costs, Sullivan added.
He said: “We have to deliver a proposition that is priced efficiently, otherwise it just doesn’t work. And there is no point being one of the best fund managers in the world if we are too expensive to buy from.
“From an IFA’s perspective, when they deliver a solution to their clients, it really needs to come in less than 1.75 per cent all in.
“So that’s the advisory fee, the platform fee, our AMC and the underlying portfolio cost — the OCF.
“And that last piece of the pie needs to be squeezed super hard, because the harder we squeeze that, the more is left for the other three players.
The differential between an active fund AMC and a Vanguard fund AMC is just too vast
“And that means we can’t occur transaction fees that we’re not accounting for, and we have to buy funds that are priced very efficiently.”
If platforms are not including ETFs or pricing them efficiently, then either the fund manager cannot use the platform, or cannot use the ETFs they would otherwise have liked to.
Sullivan added: “We’re lucky enough to have a good relationship with the likes of Vanguard who will give us their institutional + share classes.
“We are persuading more active fund houses to give us preferential pricing, because the differential between an active fund AMC and a Vanguard fund AMC is just too vast.
“I know performance can be worth paying for, but performance is also quite unpredictable; you don’t quite know what you’re paying for until you get it.”